157: Jennifer Peek — Building Company Value

So building company value is an important challenge for all of us at different times for different reasons. Maybe you want to sell the company, maybe you an exit at some point now or in the future, or maybe you need to raise some more money or renew your current financing for all those things. Improving value is important and yet there are three big mistakes that we see, especially owner operator companies. True also funded companies and even some public business but, but especially true of owner operator companies. So listen in as we talk about the three common mistakes with an expert in value improvement and M and A and small to medium sized companies. Hello and welcome again to the Scaling Up Business podcast. I'm your host and scaling coach Bill Gallagher. On the show with me today from just north Kansas City, Jennifer Peak. Jennifer is a value advisor. She works with companies on increasing the value of them so that you can sell them, fund them, you know, whatever, all the kinds of things you might want to do when you're building value. And we've talked about Value Builder and other things. I thought I'd talk with a kind of an expert in this field that spans from fairly small companies through billion dollar companies. And Jennifer has worked that span and she's going to share with us some of the ideas. So welcome to the show, Jennifer.

Thank you. Good to be here.

Yeah. So it's nice, it's nice weather now wherever we are, right. We're in watch somebody listen to this like six months from now, it sucks, it's miserable. But it's the beginning of summer where we are and it's great to talk about this in the middle of the year. And one of the things that we need to do to be building the value of the company. So welcome to show.

Thank you.

So before we get into the heart of what are the top three things that the mistakes that we see people make and how do you fix them and like that, some of the stories that go along with it. Let's talk a little bit about your background. How did you get interested in building value in companies? How does somebody get that job?

Does somebody get that job? It takes a very long time is what that is. So I grew up not far from where I live right now and it was a small town that was a mix of folks that drove into the city, which is a 45 minute drive and lots of people who had their own businesses. And my father was somebody who made the leap from doing the commuting back and forth forever and ever into starting his own business. And it was really a very positive mood for him. He had gone through his third layoff and was really tired of going through that over and over again. And that was, you know, the mid-80s. So it was, it was one of those times in the economy. And I saw how he was able to take, you know, just an idea and really earn a living at it and how much happier he was doing that.

Than having a job.

Than having a job. So I filed that in the back of my head and then I went off and did the standard things. I went to college and I got my CPA and I worked in a public accounting firm for about five years. And our firm was, it was called a regional firm. So it wasn't one of the big national firms. And as a result, a lot of our clients were family owned companies. And one of the biggest things that I saw in some of these companies was the real struggle they had with transition. And these would be companies that were in the third or fourth generation and they were a little hamstrung when they didn't have the fifth generation waiting to hand the company to and they didn't know how to exit. And so it was, it was really a dynamic time to be looking at that. While there were other shifts in the economy going on as well and seeing those business owners really question what they were going to do with the company and wanting to, you know, it was time for them to retire or they wanted to retire and they didn't have that as a choice. That was, you know, another eye opening part of business ownership. From there, I did not go into a small business. I went straight into a really, really big company, which interestingly enough was in a, in a startup phase. At the time it was, wait, the.

Big company was in the startup phase?

The big company was in a startup phase. So what had happened was a large company had partnered with four other large companies and had this small company that they were starting. I say small, but it's relative. And it was a startup. So there was a lot of how are we going to make payroll? Where are we going to get the money from? Everybody working towards the same common goal. And even if you have these large owners, which in today's world might be equivalent to a private equity firm or something like that, we still had the same concerns that small companies have, right? How are we going to, how are we going to cut the checks? And literally at times would have to get typewriters out to type the checks because the systems weren't working and all of the problem solving that every small business owner has to do and in their ownership lifespan, we were bought out by one of the large companies. And so then we became a large company. But by virtue of that transaction, I got firmly rooted into the mergers and acquisitions side of the business. So supporting it from an accounting perspective and seeing both sides of it, whether we were going to be acquired or whether we were acquiring a series of small companies. And so there was, there was a lot of that going on at the time. And my last 10 years there, I also had what we, what we now refer to as a side hustle, but that's not what we called it back then. And I started an online company, which was really, it was around that. It was. My kids were young and I was really looking for information on how to teach them about money. And back in the early 2000s, there wasn't as many resources as there are today. So I started an online website that had different resources and I ran that for about seven years and then sold it. So I got my first taste of my own little business and what that was like in terms of selling it and negotiating with the buyers on the other side and coming up with the right value and moving on from there. The other thing at the same time that my husband and I were doing was we were investing in commercial real estate and it was small apartment buildings. And we had to go through the process of getting bank financing, going through a financial statement to prove that the apartments would pay for the loan, hiring property managers, doing all of these sorts of things that we hadn't done before. And so then we had that small business in addition. And we held those apartment buildings for about 14 years. So we had quite a length of time with those. And then in 2010, I left corporate America. It was. I had done five years of integrating small companies into our portfolio and it just reached a natural conclusion when I did that. I decided to take the best of what I liked about what I was doing and start my own company. And so I started my advisory firm about nine years ago. And we've really been focused on helping the small to mid sized companies build value so that they have more options and flexibility whether they want to get more capital or whether they want to sell or whether they don't even know what they want to do. Building that value is what gives them the most options, whether that's a year from now or five years from now.

Yeah, so I thought it was great. And this is the reason that I had you on is that we have talked, we've had gurus on the subject before and so on, but not as many practitioners and the coaches are often working with our scaling clients on building value as part of the whole framework that, that we're doing. And we focus on, you know, the management team and clean books and good practices and you know, a really easy to vet thing, protected ip, solid agreements, recurring revenue, like that kind of thing. But you pointed to some common mistakes that, that we see and that I, that I think that we see again and again against those better principles. But then what are the things that people screw up? So I think maybe the first thing you tell us is the story, your first story about the client that wasn't showing profit and what you did with them.

Yeah, yeah. So one of the things that we run into quite frequently and frankly it's both for companies that are looking to sell as well as buyers who are looking to buy a company and they want to be able to get a loan to fund that purchase. And when we, you know, on both sides, when we look at it, a lot of what we see are that we have business owners who have really been coached well by their tax accountants and are minimizing their taxes and they're minimizing their profits in order to minimize their taxes.

So I've personally done this for years. Everything legal.

Everything legal. It's all great. And it's great as long as that's what your goal is.

Because it's painful to pay the taxes.

Oh, absolutely.

Even if you believe in, you know, good government and public services and driving on clean roads and things like that, like still like, oh, I don't want to pay more than I need to.

Yes, you don't want to pay more than you need to. And there are, you know, and it's a, it's a balance, of course, that you don't want to be crazy silly by paying more taxes than you need to, but you also don't want to be crazy silly by having absolutely no profit. So you've minimized your flexibility.

Yeah.

So one of the clients that we've worked with, they had actually gone through a valuation by a valuation firm and the value that had been placed on their company was about half of what the owner wanted to be able to have a successful exit. And in this particular case, the owner wanted to be able to turn the profit from the sale of his business into his next venture. He was already.

Now what kind of business, like what stage, what area, what industry can you.

Yeah. So in this, in his case, it's right here in the Midwest, he was in a construction related field where they built cabinets and they really focused on Residential. Both people that were building brand new houses as well as a lot of remodeling. Interestingly enough, they had been featured on one of the HGTV shows that had done quite a bit of work in the area that he's located in here in the Midwest. So he was getting some airtime from that and really experiencing quite a bit of business growth due to that exposure.

He's got visibility, growth, cabinet building business in the Midwest and wants to sell but is given a valuation that's half of what his number is.

Half of what his number is.

Yeah.

So we worked with him and analyzed in his particular case. He had a couple of things going on. First and foremost, just strictly related to the numerical value was that he had done this minimizing taxes play.

And.

What we were able to do for him in fairly short order was to get some of those expenses out of the business and show a profit that also leveraged this exposure and this growth that he had in his business. And in doing so we're able to get him up to the level that he wanted to sell within a year, which is a little unusual. But it was quite a fast turnaround. That's pretty fast.

So I think the big things that I see are they're carrying too much payroll, they're maximizing expenses, they, they're aggressive on inventory value. Those are the kinds of things that I think we see folks do. Is that what you would say as well or.

Yeah, absolutely. Yeah, absolutely. All of those. And the infamous year end bonuses and buying things that they didn't necessarily need and all of those things massively in December. Right. Expenses are double what they've ever been.

So figure it all out.

Figure it all out that year. You're in tax planning.

Right. So you know, and I've done that kind of thing as well in the past and I've seen clients do it as well because you don't want to pay the taxes or you can't pay the taxes. And we've been. Now as I've, as I've learned my lessons and matured and worked with more companies and listen to the leaders like yourself, learn to actually show a little more profit, show an appropriate, even a very healthy profit, pay the taxes on it, but actually put the attention more on the cash position of the company so that paying the taxes isn't stressful.

Yes, yes, very much so. And it's an interesting, you know, side note, perhaps, but, but not just an interesting side note. It's a critical point and that lots of businesses don't Pay as much attention to their longer term cash flow as they really should be. Right. They're very short term focused on I'm making payroll, I can buy this stuff to do my jobs with. We can carry the inventory that we need to carry. We can go buy a new truck when we need to buy a new truck. And that's the extent of their cash flow planning. Whereas to your point, taking that longer term approach and having that cash flow and the available cash to pay the taxes makes it, you know, it makes it less painful. No one likes writing the big checks to the tax folks, but it makes it less painful if you have it there and then you don't have to feel like you have to go get a loan to pay your taxes.

So we're looking at the cash position improvements as well as the profit improvements we're looking at. I mean a few big areas. So if you're an inventory based business, it's what kind of inventory turns, Is all of your inventory good, current inventory or is there a big block of it? That stuff that you're never going to use is really old. You bought it wrong. You can't move through it. So the quality of the inventory, the turn of the inventory and kind of the granular look at it, that's on the inventory side business.

Yes, absolutely. And one of the things for our customers, because we have a fair number of customers that are in construction or construction related businesses all the way from doing full interiors to countertops to cabinets to those sorts of things. And so they do carry inventory and a lot and, and receivables.

Raw materials.

Raw materials.

Finished and. Yeah, yeah.

And so a lot of them have a line of credit that they're utilizing and that's supported by their accounts receivable and their inventory. And there's a cap to that. I mean you can only borrow so much on your line. And one of the things that helps them utilize their cash much more efficiently is increasing how fast you can turn that inventory. Right. You still hold the same amount, but you turn it, you know, if you turn it twice as fast, then you're doing twice as much work and you still only have so much invested in any one time at inventory that's sitting there in your warehouse.

Right. So then we also see like pricing, right. People giving too much discount to win business that they don't need to do, undercutting pricing and carrying lower than market pricing for legacy customers for longer than they need to. A whole range of things to do with the pricing. We see business model problems with Receivables and payable terms that they're giving and taking from folks. Of course, the creeping overhead, subscriptions and additions and things like that that aren't really needed, that build up over time, all of these things not only affect the profit but also to varying degrees, the cash.

Absolutely. And I like your creeping overhead. I think that's so perfectly stated because overhead is often not managed as tightly as oh, I can go get that raw material for $0.10 per square foot cheaper if I go to supplier B than if I go to supplier A. And yet they're not looking at things like the software subscriptions that are piled on top of each other or the overhead increases for rent or utilities or other things that could easily be taken care of. And they're not increasing their prices to compensate for that creeping overhead. So it's, it's a, there's a, there's a whole bunch there that they're just, I hate to say it's lack of attention, but it's not a big picture that they're looking at to see what's going on.

Well then if you look at the cost of money and the timing right, not paying attention to these things like okay, your suppliers and employees are all getting paid very promptly, but your bigger customers are throwing their weight around and using you as the bank.

That's correct. So often is the case. And for, you know, our clients that are construction based clients and they're working with somebody who is on a specific draw schedule with the bank, if you miss when you need to get your invoice to them, it's going to delay your payment by at least an additional 30 days.

Yeah, it's funny, we talk, I talk about these things with total recognition. I love like oh, that and that. But I have made all these mistakes.

Well, that's why you recognize them.

Painful. Sometimes the mistakes were multimillion dollar mistakes. But yeah, I feel that heavy tuition load in my experience in education and I hope I've overcome most of them now and I hope I help our clients to overcome them. But there's some painful experience there with all of these things that we're talking about. So the next one right, is you were talking about somebody with a superstar business owner who is doing everything. Talk about that one. Tell that story.

So I like to call those my VIP owners. The gentleman that I'm going to talk about now was also in a construction related business. He focused it and also in the Midwest, his niche was really, really interesting because he started doing whole house remodels that Were focused on being green. Right. So a lot of energy efficiency, a lot of natural materials really going in and completely remodeling houses, doing 100 to $200,000 remodels that took a year at a time. And I can tell you that the houses were gorgeous when he. Yeah, and so. But it was just, you know, it was a really interesting thing, but he just. And he was a younger guy, had two small children and was originally from Park City, Utah, and decided, you know what, while the kids are still young enough that they're not in school, we really want to move back to Park City. We want to have more of that mountain outdoorsy lifestyle, mountain biking, skiing, all of those types of things. And so I really want to sell the company. And his biggest issue was that he was the project manager. He was the one who could see the vision of these fantastic homes after they'd been remodeled in this green style. And he was also the one that was having those conversations with his customers and his clients. So he was. He wasn't the business per se, because he wasn't doing all of the work, but he was the one who was critical to the success, and that was his biggest problem. His biggest problem was anybody who looked at the company, looked at the value of the company as being him. So the biggest thing that we put together for him was a plan to. You got to replace yourself before you ever get to leave. So how do we take your design skills and put them into somebody else? How do we take your project management skills and transition those to somebody else? And they didn't. They weren't the same person, but we were able to do that with him. And so over the course of the year, we got these people in, we got them trained up, we figured out exactly where they fit in the company. There were some tweaks, of course, and some moving around beyond what we thought was originally going to happen. And then he was. He was actually able to sell the company to another young man, and he left and went to Park City, Utah, and then he started a similar company in Park City, Utah. So he also did the serial entrepreneur route, but had the capital to be able to do that.

Yeah. You know, it's interesting when you talk about this. First I'm thinking about different clients and times that I did this and early stages. And I think a lot of people think, well, so this is true from my early stage to my first couple million in sales, when I launch a business, that I'm going to be doing everything, and then I'm going to hire assistants in that sort of thing. But I've seen people carry this like they do too many things or all the way through 20, even 50 million in sales and their hands are just in everything, all over the place. So the first thing, right, you talk about is having. I mean, we end up hiring helpers. But if you hire helpers and not accountable leaders and you don't develop a culture of accountability and actually give things away, then you might even have a lot of people. Like I remember one company we worked with a couple of years ago, 75 people on the team and the owner, founder had brought in a head of operations, but then now that person, so they passed the baton about that far and then that person hadn't done it in turn. So now we had 75 people or close to it, bombarding the head of operations all day long with questions about stuff. And that passing the baton has got to get something where they. There's full ownership of key roles all over the company. And the first stage of this is like, go read Gerber's E Myth and understand, like be the business owner, transfer your sort of technician genius to some other people, codify your processes, understand the different roles and build that. But then the next one is the next level of leadership. And that is you've got a lot of people around you, but they're not actually. They don't really have any authority, they don't understand their job. That's where you start to build clear accountability ownership. You start to give metrics to people. You have job scorecards, you have a culture of accountability. You've really passed things along. They can operate without you. And that's the next level. Right. And I've actually seen a couple companies through several hundred million dollars in sales where the owner of the founder of the company still had their hands in everything and they couldn't operate without them. And they were like a weak leadership team.

Absolutely. And it's really interesting because we'll see business owners at the level that you're talking about that believe that they've built out their perfect org chart, right? They've got their middle management layer and all decisions still go to the founder, the owner, the CEO. And so what you've got is you've got a buffer zone, but you don't actually have integrated, involved management that's being held to certain KPIs and to budget targets and are really integral in running the business. If you remove that founder and CEO, you're still kind of cutting the head off of the org chart. And it Won't function without it. You're paying a whole bunch of money for people who are very tactical and you haven't replaced any of that strategic decision making. And that's critical.

Yeah. So we've got to get you less central to the business then the business is fundable, survivable, transferable. If you're totally in it then and you do sell it, then you've got a really painful employment contract.

Yes. Because what you really wanted was to leave and now what you've got is a new boss.

Yeah. It's funny, I talked to one of our listeners the other day. They're approaching 2 million this year in sales. Only a couple of years in business, but already the founder of the company has hired a head of operations who's got everything. And the founder of the company is no longer in the office most days, is away most of the time, is merely driving the overall team and the strategy. I'm like, that's great. You're on to a good start.

They should go teach people how to do that.

It's a good beginning. They're off to a good start.

Definitely.

And now he's in Park City and hopefully he's doing a little bit smarter the second time.

Yeah, I think so.

Yeah. Beautiful. And then understanding the focus or where does the profit come from in the business, I think was the third piece of or the third story that you had. Is that too much here, too much there? Is it in one or more. I remember for many years I had one customer that was over half my business and it was a substantial business. But we had a great deal of concentration. We always felt the squeeze, even if they didn't know where they stood and they probably had some clue. But we felt the squeeze.

Yeah. It's really interesting because customer, customer concentration and knowing where your profit comes from or products concentration. Right. That could also be kind of a related element of it and understanding what that is, which is both a long term business goal, so you're not over, over committed in any one area. And then also understanding that if you wanted to expand something that was profitable, even if it wasn't a substantial part of your business, that knowing that that's where you want to put your next. So on the customer concentration side, it always feels great, I think for business owners when they feel like they have these loyal customers and they're repeat buyers and you don't have to go out and keep selling them, selling them, selling them. And it's great. Except when it's not, which is they're 50% of your business and suddenly they're bought by somebody else and they don't use your services anymore because they have those in house or they, the acquirer had a different provider that they prefer to use. That's a kind of a good story for the company that left you. The bad story for the company that left you is, you know, they went out of business. And you can't always tell what kind of business health your customers are in just based on how much they're buying from you and how quickly they pay you. Like you, you, you just don't have any insight into all of the rest of their business. So it can be kind of dangerous to say, well, they've bought from us for the last 10 years, they're going to buy from us for the next 10 years at the same level.

Right.

They could go, they could, they could just leave you tomorrow. So it's really looking at that and saying, okay, I understand that. How much work can I do to minimize the potential pain, knowing that it is just potential pain at this point and just making some good decisions around that. The other thing related to customers and products is just understanding where your profit comes from. So we have a client that is based in New York and they both manufacture products as well as have three different retail locations. And their retail locations are great from an appearance perspective because of where they're located in the New York area, but they really struggle with staffing and they struggle with having enough volume come through those stores on a consistent basis, whether that's days of the week or months of the year, to really make that a viable standalone business. If the only thing they had were the retail locations, it would be a very different business for them. It would be tough is what it would be. But they have products that they produce and they sell them both in their retail locations as well as in other places. And the profit margins on their products are really, really high. And they take very little effort to make and distribute. And so one of the things that we've been looking at with this company.

Is.

Instead of investing in another retail location, which we know would throw off a certain amount of revenue every year, you should take what it would cost you to open another space and really focus on developing and building out your manufacturing and your distribution, because that's going to throw off cash way into the future on a monthly basis, almost like recurring revenue. And you don't have the staffing issues with it. You don't have the overhead costs issues with it. All of the challenges we have on the other side of the business. And then if you want to open another location, that's great. But now we have the cash flow to be able to do that as well as do other things if you wanted to expand in other areas. So let's do that part first. And given that they have these retail locations and that they had opened one of them just a year and a half ago, it wasn't the way that they had normally been thinking about expansion. But when we took a look at the profitability and said, okay, really, if you think about it this way and the fact that it would build this recurring revenue, that seems to be a better solution. Plus, there's very little investment, there's truly very little immediate investment in building out this product side. There's incremental investment as the sales go up, but it's not the same thing as having to put $200,000 into building out a retail space all at once. So from a cash flow perspective, it was also a good move for them.

It was a good. Yeah. I was working with a client, one of our clients, that has grown really nicely and has a huge growth plan. And they started as a retail service business, a kind of a retail clinic, and they started providing services, and that grew then into a product line which now is distributed widely through distributors all across the country and beyond. And that's now the lion's share of the business. They still maintain a retail location that provides a brand showcase, a lab, and that'll continue to evolve. So now the retail location will need to evolve to suit that, but it provides a complement to it. But it's not a big driver in volume or profit for the business. But they keep it as that. It can become a testing lab, a showcase, a brand visibility, you know, a lot of things like that. But not a principal driver of the business.

Exactly.

So the evolution of something. And then another of our clients recently did analysis, and they realized big parts of their business, they were losing money and they were making money on some others, they were underpricing some. So they did essentially waterfall graph analysis, essentially a Pareto. Where's the Pareto? Where's the revenue profit coming from? And when we do this with clients, we first start looking at product segments, customer groups, distribution channels. We'll do any number. We'll look at a variety of different ways, and where's the volume, where's the profit? And we'll often find there's some that are doing really well and some others that are losing. And so we'll pick a couple of categories or ways of look, perspectives for the business and then we'll just go to work like raising prices or cutting out something. Usually don't have to cut it out, you just raise the price and then they either come along and they become part of your profitable group or they go away. Whether it's a product line, a service, a customer group, a distribution channel like that. Is that the kind of thing that you're doing there?

Yes, it is. And I like that there are some ways like you described, right. Some ways to test how you went and you don't have to do it all at one time. You know, pick three or four and test those and, and see whether, whether you've got a product that is still wanted in the marketplace, you can raise the prices. And if it's not, then you know what you've got on your hands. It's, it's really interesting. I think that sometimes what we see that gets missed and it's easy to happen over time is that you, you clients, customers had a unique product to start with and then over time as other competing products or other solutions have entered the marketplace. Now what they really have is a commodity and there's just a lack of visibility into that's what they're dealing with. And selling a commodity is different than selling a unique solution, especially in the.

Eyes of the customer. We often think our own thing is, is unique and special, but the customer's like, I don't get it. Seems the same as everybody else to me.

Exactly. It looks like that thing down the street there. I don't understand why yours are so fantastic.

Owner's delusion. Right? So get the brutal facts out before the team and understand really where you are. This is really great to go through some of these main things. So just to kind of recap for folks, there's three big areas that are impacting the value for owner operated companies. And you might even see this in some funded environments. But especially true of the owner operator business at any size, I see these mistakes made from companies from a few million up through half a billion in sales. So the first one is that you're suppressing the profit instead of focusing on the cash in order to minimize your taxes. And that reduces your fundability and your, your valuation. The second one is you're way too central to the business. You either have not enough people or the people you have aren't actually owning anything. They're not. So you gotta decouple yourself as an owner from the regular operation of the business so that somebody realizes they could fund it, they could Buy it. It could survive without you. Now the cool thing is you can actually keep the most fun, cool parts of your job, your business that you like and, and really give away the rest. And then, you know, get a new hobby.

Right, Exactly. Go start another company.

Take, take your family on vacation or do something.

Do something.

I, I worked myself out of a job and then I took my family to Italy for a month. It was life altering. So then the last one is this, like you've structurally set it up. You've got things too, concentrated products, customers or something like that. And you've got unprofitable parts diluting the parts that are really profitable. It's not optimized and not well balanced across that. Maybe it's a function of legacy or something else. But these are the big areas, right? I recap that well.

Yes, absolutely. Perfectly in fact.

So Jennifer Peake is at Peak Advisory. We'll put a link in the show notes if you want to find out more about that. If you need some help to improve the value, get your business sold. Jennifer probably looked to help you. Peak advisory.com and I want to remind all our listeners that we're here every week and by now we've got three years of or more of shows on every topic you can imagine around scaling your company. So go find some of the shows on something that's important to you. Fill your next run, flight, commute, workout, like whatever it is with a podcast on something. Get your brain going in that downtime. Use one of the podcasts to move you along there. So find all of that@scalingcoach.com along with free downloads of our tools, even a free book offer there. We'll send you a copy of the Scaling up book for free if you just pay the shipping handling and put you on the regular weekly update of these podcasts. So come see us, listen to us every week right here. Thanks again Jennifer for joining us on the show. We'll talk to everybody next week.

Thank you.

Well, special thanks to the original growth guru Vern Harnish for bringing us the world of Scaling up. This show is produced by Lucy Summers, audio production by Podfly Productions audio editing by Albert Burge. The show notes are compiled by Ayn Codena and proofread by Tim McGowan. If you love some part of it, please drop us a line info scalingcoach.com share it with somebody else, pass it along like and subscribe so that you get our shows again next week and every week. Thanks again for listening. Keep scaling up. Sam.